ALLMERICA FINANCIAL CORPORATION REPORTS THIRD QUARTER OPERATING EARNINGS OF $0.72 PER SHARE.
WORCESTER, Mass., October 29, 1998 - Allmerica Financial Corporation (NYSE: AFC) today reported third quarter operating income of $43.4 million, or $0.72 per share, down from $52.4 million, or $0.90 per share in 1997. Solid growth in variable product fee income was more than offset by the adverse impact of frequent catastrophes and lower investment income. Net operating income excludes net realized investment gains and losses and other non-recurring gains and charges, net of taxes and minority interest.
"Our variable products business continues to produce solid growth, and we continue to reduce underlying expenses in the Risk Management business," said John F. O'Brien, president and chief executive officer of Allmerica Financial Corporation. "While several unusual items reduced earnings for the quarter, our fundamental business strategies remain sound and ultimately will deliver superior shareholder value.
"We expect to further increase shareholder returns through our recently announced Allmerica Financial common stock repurchase program, and our pending tender offer for the minority interest in Citizens Corporation," O'Brien said.
On October 27, Allmerica Financial announced that it, or one of its subsidiaries, will make a $29 per share tender offer for the 5.9 million outstanding shares of Citizens Corporation (NYSE: CZC), or 16.8 percent interest, that it does not already own.
Allmerica Financial also announced a new repurchase authorization to acquire up to $200 million of its own outstanding common stock either through open market purchases or negotiated transactions.
Net income for the quarter was $8.2 million, or $0.13 per share, compared to $60.7 million or $1.04 per share in 1997. Third quarter 1998 pretax net income included two special charges taken during the quarter: $31.0 million associated with an accrual for pending class action sales practice litigation; and $25.3 million related to the companyíss decision to exit the assumed reinsurance pool business.
Year-to-date net operating income increased to $149.3 million, or $2.47 per share, from $125.3 million, or $2.36 per share last year. Nine months net income was $135.3 million, or $2.24 per share, up from $114.3 million, or $2.16 per share in 1997.
Segment Results:
Allmerica Financial operates in two primary businesses: Asset Accumulation and Risk Management. Asset Accumulation markets insurance and retirement savings products and services to individual and institutional clients. Risk Management markets property and casualty insurance and employee benefits products on a regional basis through The Hanover Insurance Company and Citizens Corporation.
In the segment reviews that follow, results are reported on a pre-tax basis, before minority interest in Citizens.
Asset Accumulation
Third quarter pre-tax operating earnings for the Asset Management business were $45.5 million, versus $43.0 million in 1997. Asset Management earnings through nine months were $140.9 million, compared to $113.4 million in 1997.
Allmerica Financial Servicesí operating earnings grew to $38.6 million, from $37.8 million in the third quarter of 1997. A 22 percent increase in total fee income was largely offset by lower net investment income related to operating losses of $9.5 million on two limited partnerships. Nine-month operating earnings were $123.9 million in 1998, and $99.6 million in 1997.
Retail variable annuity sales increased 30 percent in the quarter, to $866.2 million, bringing nine-month 1998 new deposits to over $2.5 billion, a 42 percent increase over the nine month period in 1997. Retail variable product fees increased 22 percent to $75.0 million, from $61.4 million in 1997. Income from subadvisory management fees was $8.2 million, a 28 percent increase from $6.4 million reported in the same quarter last year.
Retail variable product assets increased more than 19 percent, to $9.5 billion at September 30, 1998, compared to $7.9 billion at year-end 1997. Total separate account balances grew to $11.4 billion, up 17 percent since year-end 1997.
Allmerica Asset Management's third quarter operating earnings were $6.9 million, up from $5.2 million in the same period last year. The increase primarily resulted from growth in short-term funding agreement deposits, as well as from growth in investment advisory assets under management. Allmerica Asset Management funding agreement sales were $250 million in the quarter, bringing total funding agreement deposits to $1.2 billion. Through the first nine months of 1998, Allmerica Asset Management operating earnings grew to $17.0 million, from $13.8 million in 1997.
Risk Management
Risk Management operating earnings in the third quarter of 1998 decreased to $23.8 million, compared to $44.9 million for the same period in 1997, primarily as a result of increased catastrophe losses and reduced income from its group life and health business, Corporate Risk Management Services (CRMS). Risk Management earnings through the first nine months were $104.8 million and $137.9 million in 1998 and 1997, respectively.
In the fourth quarter, Risk Management will take a charge of $10 million to $12 million, related to significant restructuring in the CRMS and property and casualty operations, as follows:
CRMS is being broadly restructured to improve profitability. In addition to exiting the assumed reinsurance pool business, the company will exit its administrative services only business, close nearly half of CRMS' nationwide sales offices, and take additional expense reductions in the home office. Aggressive group medical rate increases and tightened underwriting standards are designed to further enhance profitability in 1999.
Further expense improvement in the property and casualty operations will result from the consolidation of field support activities from fourteen regional branches into three hub locations. The company will also enhance technology which enables agents to issue small commercial and personal lines policies on a largely automated basis.
Third quarter property and casualty earnings were $23.5 million in 1998, compared to $35.9 million for the same period last year. Pre-tax catastrophe losses, which added 5.8 points to the combined ratio, were $28.5 million in the quarter, more than triple the $9.2 million in the third quarter of 1997. Catastrophe losses stemmed from six events totaling $9.9 million at Hanover Insurance and two events totaling $18.6 million at Citizens Corporation.
Property and casualty nine-month earnings in 1998 were $98.0 million, down from $119.0 million in 1997. Year-to-date pretax catastrophe losses were $82.4 million, which is the worst level recorded in the companyíss history, and more than three times the $25.9 million year-to-date catastrophe losses incurred in 1997. The 1998 nine monthsí result represented more than double the five-year average annual catastrophe experience of the property and casualty segment.
Third quarter net premiums earned decreased to $487.2 million, down from $493.4 million in 1997, primarily as a result of exit states and the 1997 sale of Allmerica Re. Underlying net earned premiums grew nearly 5 percent compared to the same period last year.
The statutory expense ratio improved to 27.1 in the quarter, from 29.2 in the same 1997 period, due primarily to decreased employee-related expenses. The combined ratio increased to 106.1 in the quarter, from 105.2 a year ago, resulting from the increased catastrophe losses.
CRMS' third quarter 1998 operating earnings decreased to $0.3 million from $9.0 million in 1997, primarily driven by unfavorable claims experience in the group medical and long-term disability lines. Fourth quarter restructuring, detailed above, coupled with the charge taken in the third quarter of $25.3 million to substantially withdraw from assumed reinsurance for several voluntary group health pools, are designed to return this segment to greater profitability in 1999.
Through nine months, CRMS earnings were $6.8 million and $18.9 million in 1998 and 1997, respectively.
Corporate
Corporate segment net expenses were $9.3 million in the third quarter of 1998, compared to $11.8 million last year. Corporate net expenses through the first nine months were $35.6 million in 1998, compared to $30.8 million in the same period of 1997.
Investment Results
Net investment income for the third quarter of 1998 was $166.5 million, including the closed block, compared to $177.6 million in the same 1997 period. The decrease primarily reflects the impact of $11.7 million of losses on three limited partnership investments. Pretax net investment income of $5.3 million related to a mortgage loan prepayment partially offset partnership investment losses. For the first nine months of 1998, net investment income was $502.4 million, compared to $538.3 million in 1997.
Third quarter, pretax net realized investment gains were $9.5 million, compared to $14.7 million for the same period in 1997. Pretax realized gains and losses included nearly $51.2 million of gains on the sale of equities, which offset an $18.5 million write down of the three limited partnership investments and $29.8 million of bond impairments.
Balance Sheet
Shareholders' equity was $2.48 billion, or $41.02 per share at September 30, 1998, compared to $2.38 billion, or $39.71 per share at December 31, 1997. Excluding the impact of SFAS No. 115, book value was $38.08 per share at the close of the third quarter, compared to $36.08 per share at December 31, 1997.
Total assets were $25.2 billion at September 30, 1998, up from $22.5 billion at year-end 1997. Separate account assets increased to $11.4 billion at September 30, 1998, up from $9.8 billion at December 31, 1997.
Interim information is unaudited.
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The Hanover Insurance Group, Inc. is the holding company for a group of insurance companies headquartered in Worcester, Massachusetts.
Contact Information
| Investors: Sujata Mutalik E-mail: smutalik@hanover.com 1-508-855-3457 |
Media: Michael F. Buckley E-mail: mibuckley@hanover.com 1-508-855-3099 |